Performance Models for Initial Public Offerings

Abstract

This chapter examines the pricing and performance of ordinary, venture capital, and private equity-backed initial public offerings in the Australian stock market. We use headline underpricing, underpricing issuer loss, underpricing loss by market value, and underpricing loss by issue price to measure underpricing, and cumulative buy-and-hold abnormal returns with equal and value-weighted market indexes, market and book-to-market value quintile adjustments, and the Fama-French three-factor model to compare performance. The measures of underpricing indicate that venture capital and private equity-backed issues are underpriced less than ordinary issues. Further, all three forms of issuance outperform the nominal performance benchmarks. However, there is no statistically significant difference in the risk-adjusted performance of initial public offerings, regardless of backing.